India's Securities and Exchange Board of India (SEBI) implemented a new Closing Auction Session (CAS) on August 3rd for over 200 stocks with equity derivatives, aiming to improve price discovery and align with global market practices. However, since its introduction, this system has led to extreme volatility and wide price variations in indices like the Sensex and Nifty between 3:15 PM and 3:30 PM, the CAS window. This has caused significant concern among traders, who report that established trading strategies have been rendered ineffective.
The first monthly derivatives expiry under CAS on Thursday saw the Sensex crash over 2,200 points within five minutes (3:18 PM to 3:23 PM), only to recover nearly 2,000 points in the subsequent seven minutes. Similar dramatic swings were observed in individual stocks like Reliance Industries, which dropped 3% before recovering sharply. Traders expressed frustration, with one pointing out on X (formerly Twitter) that a $100,000 investment in Sensex put options at 3:15 PM could have yielded a $440,000 profit by 3:20 PM due to these erratic movements.
Regulators have already taken action, banning Copthall Mauritius, a JP Morgan arm, and Mansi Stock & Share Broking for allegedly manipulating prices during the auction and making illegal gains totaling nearly $3.8 million. The new system's impact is also raising concerns about brokerage revenues, with Zerodha Broking Ltd. estimating a 1% to 5% industry-wide revenue reduction, and Jefferies predicting a 5% to 10% drop in overall options volumes. This could also affect the National Stock Exchange of India Ltd., which is preparing for an IPO and relies heavily on derivatives revenue.
